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The greening of Crédit Agricole

Post-IPO, France's retail banking giant will have the currency to accelerate its expansion , if it can persuade its locally focused managers to buy into its strategy.

Post-IPO, France's retail banking giant will have the currency to accelerate its expansion , if it can persuade its locally focused managers to buy into its strategy.

By David Lanchner
December 2001
Institutional Investor Magazine

No one ever said globalization was going to be easy. Consider the plight of Jean Laurent, the affable chief executive of Caisse Nationale de Crédit Agricole. Relaxed in his expansive, wood-paneled Montparnasse office on a balmy late autumn day, he professes to worry that his chain-smoking, hardly a major sin in Paris, will be a big turnoff to investors in puritanical America.

"A lot of the world's biggest investors are based in the U.S., and they don,t like smokers," confides the head of France's biggest retail banking group with the hint of a smile. "What will they do if I ask them to buy stock in our initial public offering?"

Laurent, of course, is blowing a little smoke. After all, he's already made a small bow to U.S.-style political correctness, puffing on a Winston Ultra Light, not an unfiltered Gauloise. And as he seeks to generate interest in Crédit Agricole's upcoming IPO, which will raise about E3.5billion ($3.1 billion) in new funds and is the third-largest in Europe this year, Laurent doesn,t even plan to meet with U.S.-based institutions. The offering, part of a companywide restructuring aimed at helping the lumbering banking giant expand aggressively out of France, across Europe and into the Americas, doesn,t really need U.S. participation. Despite volatile market conditions and a new capital structure that may displease investors far more than his smoking ever could, Crédit Agricole should have no difficulty selling a 20 percent stake, thanks to its awesome distribution power and name recognition in France.

The stock sale and listing this month on Euronext Paris mark an important step in the bank's evolution. Crédit Agricole has leveraged its position as France,s biggest retail bank, 7,679 branches strong, to create the country's biggest consumer credit business and its third-biggest life and property/casualty insurance operation. Now it wants to stake out a more sizable role for itself in Europe and beyond.

"To stay ahead of the competition, we now need to become a bank offering a full range of financial services to both retail and business customers not just in France but in Europe and even globally," says Laurent, 56, a longtime Crédit Agricole employee who held senior positions in its insurance and consumer finance businesses before becoming deputy chief executive in 1994 and rising to the top spot in 1999.

But peddling shares in France may be easier than selling Crédit Agricole's global strategy. Crédit Agricole is a formidable organization. With E535.7 billion in assets, it ranks as the sixth-largest bank in the world, according to The Banker magazine, and it's expected to make a profit this year of E2.4 billion. But it's hardly a model of efficiency: Its 10.7 percent return on equity last year lagged well behind the 16.1 percent level of its peer group of major French banks.

Laurent is fond of saying his vision is for a "banking group that is a leader in France, with a presence in Europe and a global ambition." But the farther he gets from France, the more diffuse Laurent,s plan seems to become. "It's easy to understand why Crédit Agricole wants to reinforce its position in domestic markets," says Raphael Hausmann, a banking analyst at Lombard Odier Asset Management in Zurich, which has about Sf100 billion ($60 billion) under management. "But it's not clear where they are hoping to add value or achieve critical mass internationally."

Crédit Agricole already has an eclectic international portfolio, with stakes in Portugal,s Banco Espírito Santo, Commercial Bank of Greece, Poland's Europejski Fundusz Leasingowy and Lukas Bank and Italy's IntesaBci, not to mention financial institutions in Argentina, Brazil, Chile, Lebanon, Morocco, Saudi Arabia and Uruguay. Even Laurent concedes that the current mix, largely geared to retail product joint ventures, can seem haphazard. And two operations that he would like to acquire, Crédit Lyonnais and Lazard, which would solidify his global network, have stumbled in recent years , hardly a calming prospect.

Moreover, Crédit Agricole's IPO leaves intact a complex, unwieldy management structure. Most of the bank's higher-margin businesses, such as investment banking, asset management and insurance, will be concentrated in the quoted vehicle, Caisse Nationale (renamed Crédit Agricole SA at the end of November), which oversees Crédit Agricole's decentralized operation. Lumped together, these lucrative units might be expected to garner a bigger multiple than the group would otherwise merit. But to prosper, they need to be able to sell their products through the bank's vast distribution channel controlled by its powerful regional banks, or Caisses Régionales, which are owned by their mutual shareholders. Unfortunately, these institutions, deeply rooted in and focused almost entirely on providing traditional banking services to the Gallic retail marketplace, can choose not to sell the higher-margin items , and often do. This clumsy structure is likely to hinder efforts to grow as rapidly as Laurent wants. "The decentralized, mutual structure is the group's biggest weakness when it comes to allocating assets, pushing particular products or achieving synergies in the case of mergers," says Hausmann.

Crédit Agricole needs help in its higher-margin areas. It ranks second in France in assets under management, and its market share in this lucrative area is a robust 11.8 percent. Yet that penetration is barely half of its gargantuan 21.4 percent share of France's retail banking assets. The bank's main mutual fund arm, Crédit Agricole Asset Management, has posted middling returns. Its flagship French equities fund, the E2.8 billion Atout France C, lost 2.7 percent over the past three years and ranks 23rd out of 78 funds during that time frame, according to Standard & Poor,s. The firm's largest European stock fund, the E1.25 billion Atout Europe, lost 18 percent over three years, placing it 36th out of 50 peer funds.

Crédit Agricole acquired a solid investment banking presence when it bought Banque Indosuez (renamed Crédit Agricole Indosuez) in 1996, but it's hardly a household name in global finance. The investment banking unit generates only about half the revenues (E3 billion) that the investment banking operations of BNP Paribas (E6 billion) and Société Générale (E5.2 billion) do. Although it posted healthy profits in 2000, Crédit Agricole Indosuez doesn,t rank in the top 20 globally in any major investment banking area , bond or stock underwriting or M&A advisory. Most of its revenues come from its CAI Cheuvreux brokerage, France's third biggest, which depends largely on French retail stock trading.

With 8.4 million policyholders, Crédit Agricole,s life subsidiary, Predica, markets through both the retail network and the group's investment bank. Founded 16 years ago, it now has a 10.9 percent market share. Crédit Agricole's property/casualty insurer, Pacifica, is among France's top ten, with a portfolio of some 2.4 million policies representing E442 million in premium income. Pacifica and Predica clearly have strong market positions, but they, too, lag well behind Agricole,s huge share of the retail banking market.

Moving aggressively has never been easy for Crédit Agricole. Mutual shareholders have owned and controlled the bank since it was created by government decree in 1894 to meet the borrowing needs of farmers. Crédit Agricole is structured as 48 largely autonomous regional banks, owned by 2,672 local banks, which are in turn owned by 5.5 million mutual stockholders, almost all of whom are longtime retail and business customers. Running the mostly rural Caisses Régionales is a group of chief executives, commonly referred to as the "barons," who answer to boards appointed by mutual shareholders.

The barons control the most powerful retail distribution network in France. They handle 80 percent of all lending to the agricultural sector and count more store owners and self-employed professionals among their clientele than does any other bank in the country. They hold a massive 24.6 percent share of France's housing loan market and a dominant 16.9 percent of its entire consumer credit business. Their grip on business lending, particularly to small and medium-size companies, is also the strongest among France's retail banks, at 12.2 percent.

As their name suggests, the barons operate with considerable independence. Laurent and chairman Marc Bué, a well-to-do farmer, head up Caisse Nationale, though they report to the barons at annual general meetings. Achieving a consensus and setting an aggressive action plan is almost impossible in a system more akin to a parliamentary government than a private enterprise. In trying to sell the idea of the stock sale, Laurent and Bué held 150 meetings over two years with employees of the 48 Caisses Régionales before the plan was finally given the green light.

The regional banks pick and choose what financial products they want to offer and make all of their own lending decisions. "Only in extreme cases do we interfere in the management of the Caisses Régionales," says Laurent. "Since they know their clients best, they have considerable freedom."

Motivating the barons is thus not such an easy task , no one has unfettered power in Crédit Agricole,s intricate matrix of responsibilities. Caisse Nationale oversees the use of 50 percent of the funds raised by the regional network's retail operations. It also supervises the risk profiles of the Caisses Régionales to ensure that they are operating prudently. Post-IPO, Caisse Nationale will not only own all of Crédit Agricole's insurance, investment banking and asset management businesses but also a 25 percent piece of the huge retail banking operation.

After the IPO the mutual shareholders will still own more than 70 percent of Crédit Agricole and , even if Laurent and his management group use the new shares to make acquisitions , mutual ownership must never go below 51 percent. "Our domestic retail network accounts for 70 percent of our revenues and is the cornerstone of our group," Laurent explains. "Insuring control [by the mutual shareholders] is a guarantee that a culture that has given us the No. 1 spot in French retail banking will not change."

This inherent inefficiency isn,t lost on investors , who in turn will determine the price of Crédit Agricole shares , and ultimately Laurent's ability to make acquisitions using stock. "Given that the interests of mutualists and shareholders are not always the same, corporate governance could well be a mess," says Jean-Marie Eveillard, manager of the $2.1 billion First Eagle SoGen Funds in New York.

The sanctity of the current structure raises questions not only about the bank's ability to execute a strategy, but also about dilution. If Laurent has to keep mutual shareholders above their 51 percent threshold, he also has to make special rights offerings to them to assure their control. "That possibility by itself will be a major weight on these shares," says a London-based investor managing a E600 million hedge fund.

To be sure, Crédit Agricole will undertake some streamlining after the IPO. The number of regional banks will be reduced from 48 to 44 next year and to 35 within five years (part of a longer-term program that since 1988 has cut the number from 94). The bank also plans to reduce its 40 different information technology systems to seven within five years.

Shares created via the IPO very possibly will go toward purchasing one of Crédit Agricole's domestic rivals, Crédit Lyonnais, in which it is already the largest private shareholder, with a 10 percent stake. The government of Socialist Prime Minister Lionel Jospin wants to sell off its 10 percent holding in France's fourth-largest bank. Government officials believe that a Crédit Agricole,led merger would create a banking group positioned to become a prominent player in Europe. Laurent agrees: The acquisition of the E188 billion-in-assets Crédit Lyonnais, he says, "would complete our development in France and help give us a head start for further European growth."

Combining with Crédit Lyonnais's 6 percent share of the French retail market would give Crédit Agricole an even more commanding 27.4 percent of the country,s retail banking business. What's more, in contrast to Crédit Agricole's dominance in rural and suburban areas, Crédit Lyonnais's strength is in France's four biggest cities, Paris, Marseilles, Lyons and Lille, where its market share is closer to 10 percent. "The two networks are highly complementary," says chairman Bué.

Then again the nettlesome issue of control arises with each discussion of a potential acquisition. Were Crédit Agricole to buy 100 percent of Crédit Lyonnais, mutual shareholders could see their stake in the combined group drop below 51 percent, say analysts. "It doesn,t take an Einstein to figure out that if a premium is paid for the rest of Crédit Lyonnais, the deal could trigger a new capital increase," says a London-based analyst. Giving the mutual shareholders enough stock to get them back above 51 percent would dilute public investors.

In late November the merger doesn,t seem a sure bet. Both German insurer Allianz and Société Générale also hold large stakes in Crédit Lyonnais, and the French government could still decide to reward them at the expense of Crédit Agricole. Indeed, there has been speculation in the French press that Crédit Agricole and Allianz might each get half of the government,s share.

Either way, an acquisition could also open up a potential can of worms. Crédit Lyonnais's net profit is expected to rise almost 30 percent this year, to E910 million, but the bank is facing a potential avalanche of lawsuits and criminal charges in the U.S. over its role in the 1991 purchase of California's bankrupt Executive Life Insurance Co. California's state attorney general has filed a $2.5 billion civil fraud suit against Crédit Lyonnais on behalf of Executive Life's 340,000 policyholders, charging that the bank illegally controlled more than 25 percent of the insurer through secret agreements with European front companies in the early ,90s. If the state proves that Crédit Lyonnais deliberately hid its control of Executive Life to get its hands on the company,s lucrative portfolio of junk bonds, the bank could be in serious trouble. The U.S. Attorney's office in Los Angeles is also preparing an indictment against Crédit Lyonnais, and the Federal Reserve Board is considering banning the bank from operating in the U.S. Crédit Lyonnais has declined to discuss the matter.

Another oft-rumored acquisition candidate for Crédit Agricole is Lazard, the venerable investment bank. After forming a small but profitable derivatives joint venture with Lazard in 1994 and an equity underwriting business in 1999, Crédit Agricole purchased a 31 percent stake in Lazard's holding company, Rue Impériale de Lyon, last year for E594.6 million. Laurent declines to discuss a takeover of Lazard, which has undergone several years of management turmoil and a subsequent drop in market share, but does say he,s "interested in building on existing partnerships" with the investment bank. Obviously, Lazard would offer a world-class name in the M&A advisory business, though the firm, like Crédit Agricole, lacks global clout across a wide range of investment banking businesses.

Just last month Lazard chairman Michel David-Weill recruited banking legend Bruce Wasserstein as his new CEO and said the firm will give 30 percent of its equity to its 140 partners, thought by some to be a prelude to a possible sale.

Laurent's goal is to achieve a 14 percent ROE by 2004, but being forced to achieve a higher ROE doesn,t sit well with some of the barons, even though they have agreed in principle to Laurent's target. "There is a risk that the CNCA could pump our resources once it,s quoted," says Guy Caudamine, chief executive of Caisse Régionale de Crédit Agricole du Calvados, headquartered in the provincial city of Caen in Normandy. "That could involve asking us for too much when it comes to return on equity, something that could be harmful to the long-term, stable development of our business."

Caudamine and the 47 other regional CEOs approved the listing proposal unanimously in late October but only after countless hours of consultations with Laurent and Bué. One of the last of the barons to consent, Caudamine remains wary about mutual shareholder control. "It is clearly very important that we have a listing," he acknowledges. "Our business clients are becoming European and even international, and our individual depositors are demanding increasingly sophisticated service, so we need to expand in Europe and overseas." But, he adds, "that must not change the way we do business."

This reluctance to adapt is a cause for concern. "One of the real question marks at the group is how fast they will be able to increase the sales of higher-margin insurance and asset management products in their retail network," says a London-based analyst. If Crédit Agricole could get its asset management and insurance penetration closer to the 21.4 percent level of its overall retail banking business, the "bank,s return on equity would be more in line with industry norms," notes the analyst.

Indeed, if Caudamine's views are any guide, Laurent and his senior management team have a lot of work to do. During more than a decade as CEO, Caudamine has resisted jumping into most of the bank's profitable insurance products; instead, he sticks unapologetically to a business of largely agricultural, consumer, real estate and small-business loans.

"Our area of Normandy already has more than enough life and property/casualty insurers, so that is not really that promising a market for us," says Caudamine. He adds: "Crédit Agricole has done well as a mutualist organization because it makes us closer to our customers. While that has not traditionally produced enormous growth, it has produced steady and regular returns."

However, predictable profit growth and lackluster returns on equity aren,t likely to satisfy investors or allow Laurent to push ahead with more foreign joint ventures or bigger acquisitions. That prospect doesn,t seem to weigh on him. Taking a drag on another of his Winston Ultra Lights, the chief executive insists that Crédit Agricole's strategy will be vindicated over time. Post-IPO, America and its fanatical nonsmokers will have to wait a little longer.